<p>
  In this tutorial we will take a close look at the Dynamic Breakout II strategy based on the book <a href="http://www.wiley.com/WileyCDA/WileyTitle/productCd-1118168275.html">Building Winning Trading Systems</a>.
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<p>
  First we decide the look-back period based on the change rate of volatility, then we make trading decisions based on the highest high and lowest low from the look back period as well as a Bollinger Bands indicator. It is an auto adaptive trading system that can adjust its buy and sell rules depending on the performance of these rules in the past. In addition to Forex markets it is widely used in future and equity markets. You can refer to <a href="https://www.youtube.com/watch?v=MxGVqSvLqDQ">this video</a> to learn more about dynamic break out II.
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<p>
  The original Dynamic Break Out system was developed by George Pruitt for Futures Magazine in 1996. The logic behind the dynamic breakout system is that the volatility component changes the lookback period, then the enter and exit points are decided by the highest high and lowest low price over the lookback period.  The newer version of the Dynamic Break Out is just like the original, except we introduce the Bollinger Band and adjust the number of look back days using the market volatility, so different market conditions perform better with different parameters. In addition, the stop loss signal is fixed in version one, but in version two the liquidate point is based on the moving average indicator and the length of moving average is dynamically changed with the look-back period.
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<p>
  We backtested the strategy on EURUSD and GBPUSD over 6 years period.  The result suggests a drawdown of 20% and the strategy caught the market turning points. It is especially profitable in a trending market.
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